Three Pillars for Prosperity in Montenegro

Over the last decade Montenegro has trebled its gross national income (from $2,400 in 2003 to $7,160 in 2012), has reduced its national poverty headcount from 11.3 percent in 2005 to 6.6 percent in 2010, and enjoys the highest per capita income among the six South East European countries.

Despite this considerable progress, however, Montenegro remains a country in need of a new economic direction. The global financial crisis has exposed Montenegro’s economic vulnerabilities and has called into question the country’s overall growth pattern. The period between 2006 and 2008 was characterized by unsustainably large inflows of foreign direct investments (FDI) and inexpensive capital, which fueled a domestic credit consumption boom and a real estate bubble. When the bubble burst in late 2008 and in 2009 real GDP shrank by almost 6 percent, triggering a painful deleveraging and a difficult recovery that is not yet complete. With the base for Montenegro’s growth narrowing and the country’s continued reliance on factor accumulation rather than productivity, it has become clear that this old pattern cannot deliver the growth performance seen just a few years ago.

As spelled out in the recent report “Montenegro – Preparing for Prosperity” this country can go a long way toward returning to the impressive economic gains it was making just a few years ago by emphasizing three critical areas of development: sustainability, connectivity, and flexibility.

Sustainability
To accelerate growth in coming decades, Montenegro needs to shift to more productivity-based policies that foster knowledge and skills, as well as fiscal and financial sector sustainability. If Montenegro can achieve productivity growth of just 0.6 percent or higher, this country could achieve overall economic growth rates of 4 percent or more. Maintaining this kind of growth over two decades would be truly transformational for Montenegro – boosting incomes and living standards. With the right mix of macroeconomic, institutional, and structural policies that support healthy credit growth for the private sector and build fiscal buffers supported by credible fiscal rule, this rate of growth should be achievable.

Connectivity
Montenegro, as a small state, must improve its connectivity with world markets. But connectivity depends on more than trade - skills also matter. Indeed, Montenegro can build on its existing export base, especially tourism and wines, but it also has the potential to branch out into agriculture, food processing, and even energy and ICT exports. Knowledge and infrastructure (transport, energy, and ICT) are central to virtual and physical connectivity, expanded trade, and enhancing the country’s attractiveness as destination for tourism and investment. Information and transportation infrastructure is at the heart of domestic regional integration in the country. The quality and safety of road and railway infrastructure is paramount in creating opportunities for regional connectivity – leading to reduced costs and helping the economy become more competitive and export oriented.

Ambitious reforms which can help quell corruption and lead to a public sector populated by individuals focusing squarely on the public interest and the most efficient delivery of services to citizens will also help Montenegro’s economy connect with multinational companies, which can be a source of know-how, skills and jobs. Credible evidence of a clear separation between politics and business will encourage the kinds of foreign investment and multinational activity necessary to bring about an openness needed by Montenegro in order to prosper more.

Flexibility
In many ways Montenegro is relatively flexible in adapting to new opportunities and to change. Montenegro is consistently rated as having the second best investment climate in the region (after FYR Macedonia) and its investment climate continues to improve on many metrics. Among Montenegro’s areas of strength are regulations on starting a business, product market regulation, freedom of retail distribution, and absence of regulatory limitations on the number of competitors in a product market.

However, there is still considerable scope for improvement.

In the construction sector, particularly, problems with access to electricity, registering property, enforcing contracts, acquiring permits, and the costs “communal services” all heavily restrict flexibility, adversely affecting investments and job creation. An important benefit of increased flexibility in doing business environment is the incentive it offers to move economic activity from the informal to the formal sector. Workforce skills are also important - flexibility is enhanced if employees do not define themselves as narrowly specialized, and policies should ensure that worker benefits are readily transferable between employers.

By prioritizing these key areas of engagement and by vigorously pursuing a policy agenda that strengthens sustainability, connectivity, and flexibility throughout the country, Montenegro will be able to reap the substantial benefits of higher and more robust growth, greater employment, and better living standards for its citizens. These prospective benefits are largely dependent on the response and quality of Montenegro’s economic policy and reforms which, in turn, are dependent on the country’s policy makers, private sector, and Montenegro's citizens.